“These favorable factors are partially offset by exposure to possible adverse reserve development due to the relatively large portion of casualty reserves, potential risks associated with its expanding mortgage operations and possible volatility from large catastrophe-related events

“The Outlook revision to Stable from Positive reflects the shifting market landscape in both commercial insurance and reinsurance business that is pressuring profitability and leading to consolidation as companies aim to enhance their relative competitive position.

“ACGL has favorably achieved steady growth in capital over time and maintains a medium market position and size/scale. The company’s overall market position, however, trails several of its’ higher rated [re]insurance peers that maintain a large market presence.

“The ratings also reflect Fitch’s negative sector outlook on global reinsurance. The current stressful reinsurance market conditions, with record capitalization levels of traditional reinsurers and the growing capacity provided by alternative capital providers, are promoting weaker pricing and more generous terms and conditions.

“Fitch views this diversified source of revenues and earnings favorably as it provides the company flexibility to deemphasize various products when market conditions are poor and reduces its dependency on any single product line.

“ACGL’s profitability is strong, characterized by low and stable combined ratios and high returns on average common equity [ROAE]. The most recent five-year averages [2010-2014] of 91.9% and 14%, respectively, are in line with or better than peer averages and align with Fitch’s median ‘AA’ and ‘AAA’ [re]insurance sector credit factors.

“Through the first six months of 2015, ACGL reported a combined ratio of 89.2% and annualized ROAE of 13.4%. ACGL has posted an underwriting profit and overall net income in every year of its 13-year operating history.

“The company’s financial leverage ratio is modest at 12.7% as of June 30, 2015, down from 12.9% at year-end 2014. This slight decline reflects flat growth in first half 2015 shareholders’ equity available to ACGL of $6.1 billion at both June 30, 2015 and year-end 2014 as net earnings were offset by increased share repurchases and preferred share dividends. Fixed charge coverage was a strong 12.1x through the first half of 2015, up from 11.5x in 2014.

“Key rating triggers that could result in an upgrade include improvement in ACGL’s competitive market position while demonstrating favorable run-rate earnings and low volatility in the challenging [re]insurance environment, with a combined ratio in the low 90s; successfully managing both the mortgage operations and the Watford Re platform, with exposure growth prudently managed.

“In addition, continued growth in equity while maintaining a net written premiums-to-equity ratio of 0.8x or lower, a financial leverage ratio at or below 20%, and fixed charge coverage of at least 10x could generate positive rating pressure.

“Key rating triggers that could result in a downgrade include sizable adverse prior year reserve development or difficulties experienced in the mortgage insurance operations or Watford Re platform. In addition, increases in underwriting leverage above 1.0x net written premiums-to-equity ratio or a financial leverage ratio above 25% could generate negative rating pressure.

“Also, if ACGL’s capital from foreign subsidiaries outside of the Bermuda group solvency environment increased to 35% or more [32% at year-end 2014], the holding company ratings could be lowered reflecting a ring-fencing environment classification.”